THE present government was faced with an uphill task of economic revival of the country when it came to power.
The major challenges faced by it included: restoring investors’ confidence, reviving economic growth on a sustainable basis in the medium-term, restoring macroeconomic stability by reducing fiscal and current account deficits and maintaining price stability, reducing debt burden to a sustainable level in the medium to long-run, arresting the rising trends in poverty and building social safety nets, improving social indicators, and improving the governance.
To address these challenges, the government began to implement a wide-ranging economic reform programme.
As a result of the Investment Policy Reforms of December 2000, the entire services sector was opened for the FDI. The minimum foreign equity for non-manufacturing sector was reduced from $0.5 million to $0.3 million and restrictions on remittances of franchise, royalty and technical fees for non-manufacturing enterprises were relaxed. Now, the foreign investors are allowed to select any field of investment, barring a few industries and foreign investment on repatriable basis is allowed in services, infrastructure, social and agriculture sectors.
The petroleum sector, which meets 84 per cent of the total primary commercial energy needs, has been identified by government as a priority development sector with considerable potential. Historically, the sector has been strictly controlled by the state leading to lack of investments and poor operational efficiencies. Deregulation and privatization of the sector are the stated objectives of the government and several measures have been taken to achieve these objectives. They are:
a. Liberalizing oil imports and prices: Import of fuel oil and diesel oil have been deregulated. Consumer prices of petroleum products are now linked to the international market and are reviewed periodically. A controlled and equalised price distribution (freight pool) system for oil products is being dismantled in a phased manner.
b. Liberalizing gas prices: Consumer prices of gas are now being reviewed every six month linked to international fuel oil prices. The cross-subsidies will be withdraw over a three year period.
c. Deregulating and restructuring public sector enterprises: The Boards of Directors of public sector companies have been reconstituted and given full autonomy with majority of members from the private sector. The government’s role has now been confined to policy making while its role of a regulator and as a shareholder is being shed. The programme of privatization is well advanced with Oil and Gas Development Company Limited, Pakistan Petroleum Limited and Pakistan State Oil Company Limited at the top of the list. The programme provides investment opportunities of around $5 billion.
d. Creating regulatory environment: A Gas Regulatory Authority has been set up. However, it will shortly be merged into the Oil and Gas Regulatory Authority, to cover all regulatory functions of downstream oil and gas sectors, excluding negotiations and award of petroleum concessions. A Government Holding Company has already been formed to manage government’s investment in the upstream sector.
e. Promoting foreign investment: A new offshore policy for export and promotion activity based on production-sharing has been announced last year while the onshore policy has been reviewed recently so as to make it more competitive in the regional context. Efforts are being made at the highest level to open up the force-majeure areas in Balochistan. Issues concerning gas well-head pricing, arising out of previous policies have largely been resolved. Margins of oil marketing companies are being increased to improve return and to encourage them to invest in storage facilities and infrastrucure.
Response to these measures has been encouraging and since October 1999, an investment of $978 million has been committed. This amount includes $73 million for exploration, $505 million for gas fields development (including Lasmo, $268 million, OMV $160 million), $278 million for oil pipelines and $55 million for marketing. An additional amount of $67 million is to be invested by local companies.
f. Developing gas market: Development of recently discovered gas fields is being expedited with most of the well-head price issues now settled. Additional 1 billion cubic feet per day of gas is being brought into the system through this programme within a 30-month period. First of these gas fields (Zamzama -BHP) has already been brought on stream in March 2001.
Transmission and distribution infrastructure is being improved and expanded to cater for an additional 850 million cubic feet per day of gas through a Rs20 billion project plan.
g. Protecting the environment: Share of natural gas in the energy mix is being increased, being the cleanest fossil fuel. Use of CNG is being encouraged in transport sector to improve ambient air quality and reduce carbon emissions. More than 175 CNG stations are operational meeting the requirements of about 200,000 vehicles. Quality of gasoline is being improved as 80 RON has been discontinued, lead content reduced in 87 RON and unleaded gasoline is being introduced from 1st July 2001. Availability of LPG has been increased and its use as domestic field is being encouraged to conserve forests and wood resources.
The policy focus for the upstream petroleum sector is to accelerate exploration and production of oil and gas activities through consolidation, continuation and improvement of policy terms, and operational flexibility. In line with these objectives, the government has prescribed production sharing contracts in offshore with incentives based on water depths. For onshore exploration, income tax rate has been reduced to 40% from earlier 50 to 55 per cent. Furthermore, the onshore zones have been redefined particularly in difficult areas where exploration companies were not showing interest.
The government is giving high priority to coal for its utilization in power, cement and other processing industries to encourage promotion of indigenous resources. Pakistan is endowed with a huge coal resource of about 185 billion tonnes, the bulk (175 billion tonnes) is located in Thar desert of Sindh Province.
A task force, drawing experts from both public and private sector, has been constituted to study the techno-economic feasibility of conversion of cement and other processing plants from furnace oil or gas to coal.